State Automated Retirement Savings Programs Continue to Complement Private Market Plans
Federal data for 2021 shows new state-facilitated initiatives may boost private sector plans
New federal data for 2021 shows that implementation of state-facilitated retirement savings plans for private sector workers without workplace plans may be having a positive impact on the creation and retention of private plans. Businesses in California, Illinois, and Oregon, three of the first states to launch programs to help private sector workers without workplace plans save for retirement, continued to create new plans in 2021 at rates similar to or exceeding those in states without such programs.
Moreover, employers were shedding existing plans at rates comparable to the national average, according to analysis of the most recent available federal numbers.
Six years ago, Oregon started enrolling private sector employees in OregonSaves, the first such state initiative in the nation. Today, 11 states have established these automated programs to help workers save in their own individual retirement accounts. The programs, also called auto-IRAs, are privately managed.
Employer eligibility is usually determined by the number of workers and whether the employer offers workers a retirement plan. To encourage savings, employees are automatically enrolled but can opt out. They contribute a portion of their regular paychecks, but can raise or lower the percentage at any time.
Programs in California, Illinois, and Oregon have been taking contributions to the accounts for at least four years. Employers covered by an automated savings programs have two options: They can either enroll their workers in the government-facilitated initiative or exempt themselves by adopting their own retirement plans.
The issue, then, is whether these state programs might “crowd out” the private market for plans. Would eligible businesses not adopt their own defined contribution plans, typically 401(k)s, or might some terminate existing plans? Alternatively, could these programs encourage employers to adopt new plans?
Pew initially investigated these questions in 2021, with an update in 2022, by examining data from the annual filings to the U.S. Department of Labor by employer-sponsored plans from 2013 through 2019. The analyses suggested that, in those states sponsoring automated savings programs, employers with plans continue to offer them and businesses without plans were adopting new ones at rates in line with, or even above, the national average.
In 2021, California still had a higher rate of retirement plan creation than the national average, and the state’s share of new plans remained among the highest in the country. Illinois, meanwhile, had consistently had a lower share of new to existing plans than the national average since 2013, but the share of new plan creation in the state increased in 2021 by more than 1 percentage point.
In all three states examined, the rate of introduction of new plans, as a share of existing plans, remained higher than before each introduced its savings program:
- In California, the share of new plans rose from an average of 8.1% between 2013 and 2018 to an average of 9.4% from 2019 through 2021, when the CalSavers program was enrolling workers.
- In Illinois, the average share of new plans increased from 5.3% between 2013 and 2017 to 6.2% after Illinois Secure Choice started enrolling savers in 2018 through 2021.
- Oregon also saw an increase in the share of new plans from 6.7% on average between 2013 and 2016 to 8.5% on average in the years after OregonSaves started operations in 2017.
- The changes in the share of new plans pre- and post-implementation of the state programs aligns with national trends and in some cases proves larger than the national change. For example, compared with the California experience, the share of new plans in the U.S.—excluding California—increased from an average of 6.4% before 2019 to 7.3% from 2019 to 2021.
Some have also questioned whether state programs might entice employers with plans to drop them to enroll workers in the state programs. That does not appear to be happening, according to the analysis of 2021 data.
Nationally, the rate of plan terminations rose by .23 percentage points between 2020 and 2021 after having fallen the previous year. Termination rates increased in both Illinois (.27 percentage points) and Oregon (.41 percentage points), but the rate of plan terminations in California remained flat, falling just .03 percentage points in 2021.
All three states had plan termination rates below the rate for the nation as a whole in 2021. And the changes in states with automated savings programs appear to be in line with the overall national trend.
This evidence from California, Oregon, and Illinois continues to indicate that automated savings programs complement the private sector market for retirement plans such as employer-sponsored 401(k)s. Results from an earlier Pew survey of employers that was done as states were first considering such programs suggested that the state efforts could nudge employers toward offering such benefits: In the survey, many employers without plans stated that they would adopt their own if they were required to choose between enrolling workers in a state program or starting one. In addition, a report from Gusto, a payroll and benefits provider based in San Francisco, indicates that the company saw new plan growth in the run-up to the 2022 compliance deadline for employers in California as it marketed retirement plan services. That trend continued after the state compliance deadline.
Oregon first enrolled workers in its program in 2017, followed by Illinois in 2018 and California in 2019. Several years of data now suggest that states with automated savings programs can help fill the gap for employers who may not be ready or able to provide their own plans—without hindering the private market in those states.
How the retirement plan adoption rates were calculated
The data comes from federal Form 5500 Annual Reports, a required regulatory filing to the U.S. Department of Labor (DOL) for sponsors of retirement and welfare benefit plans. Pew drew on data from Form 5500s and Form 5500-SFs, or short forms—typically for plans with fewer than 100 participants—from 2013 through 2021.
Using the benefit codes provided by the filers, Pew limited the review to employers offering retirement plans, including defined benefit and defined contribution plans. Plan sponsors are required to file only once per plan per year, and a plan with participants across several states would be represented only in the state where it was filed and may include workers in additional states.
In this latest analysis, Pew updated its approach to handling duplicate observations in the update of the data. Previously Pew used the filing year that a business filed the Form 5500 to identify each year. In this analysis, researchers began using the plan year identified on the form to identify each year. In the vast majority of cases (98%), observations were consistent across filing and plan year. This approach allowed Pew to better identify duplicates and classify observations in their appropriate year.
Similar to past analyses, when employers filed multiple times for the same plan in a given year and state, Pew eliminated duplicates by following simple and consistent guidance, for example keeping initial and final filings instead of those that represented continuing plans. Cases in which a single filing was reported as both an initial filing and a plan termination were dropped.
Previously, when employers filed multiple times for the same plan across several states, Pew eliminated duplicates according to simple algorithms, for example, keeping the record of a state where the plan had filed in the previous year and dropping other state filings. Using the plan year rather than the filing year addresses much of this problem because businesses occasionally file multiple plan years in the same filing year. That can create duplicate records in the same filing year which are actually for different plan years. Using this approach left only 454 cases of duplicates (or 227 duplicate pairs) across multiple states. These observations were excluded from the analysis.
The DOL’s Form 5500 data continues to be updated, typically around the beginning of each month. The data used for this report, from 2013 through 2020, was downloaded in January 2022. The newly available 2021 data was downloaded in December 2022.
Theron Guzoto and Mark Hines are principal associates and Alison Shelton is a senior research officer with The Pew Charitable Trusts’ retirement savings project.